HSBC charges into the U.S.: the London bank sees the U.S. as one of the world's ripest targets

Chief Executive, The, March, 2005 by Peter Thal Larsen

At a recent HSBC board meeting, Sir John Bond stood up in front of the bank's directors to deliver a detailed report on a subject of considerable importance: the group's record on acquisitions. The HSBC chairman's conclusion was generally positive. The bank's biggest purchases, which include Hong Kong's Hang Seng Bank in 1965 and Britain's Midland Bank in 1992, as well as Republic National Bank of New York five years ago, had been a success. Though there had been some mistakes, they were long ago.

For Bond, 63, the internal inquiry is an example of the bank's ability to learn from mistakes through what he calls "intelligent self-criticism." For a bank that analysts estimate has acquired more than 50 businesses at a cost of more than $50 billion over the past 12 years, its ability to identify and integrate acquisitions is crucial to its future growth. The conclusion that HSBC's record is improving is therefore encouraging. "The board should fire me if we're not [improving]," says Bond, who started his career at the bank in 1961. "We're paid to get better."

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Bond argues that, over the next 25 years, most of the growth in the global economy will be concentrated around the twin poles of North America and China. The logical conclusion is that HSBC must get bigger in both territories, particularly in the United States. "America is the largest financial market in the world and it happens to be accessible," Bond says, adding that it is relatively fragmented compared with most European markets, and is generally more profitable. "You will see the financial institutions in America, over the cycle, make better returns on shareholders' funds than you will in some of the major economies in Europe."

While HSBC has had a presence in Asia for almost 140 years, it is a relative newcomer in the U.S. The bank established a foothold by taking control of Marine Midland in the 1980s, but its business today is largely the result of two large deals: the purchase of Republic National Bank of New York in 1999 for $10 billion and the acquisition in 2002 of Household, the consumer finance group, for about $15 billion, HSBC's largest purchase.

These deals have alerted American bankers to HSBC's ambitions in their home market. While Citigroup has a larger market capitalization, HSBC trades on a higher multiple of earnings. The premium reflects what some investors see as the group's superior growth prospects, as well as its ability to avoid the regulatory mishaps that have damaged Citigroup's reputation.

Now that Chuck Prince, Citigroup's chief executive, has ruled out large acquisitions for the foreseeable future, and JPMorgan Chase and Bank of America are still digesting recent mergers, HSBC is regularly mentioned as the most likely buyer of U.S. banks.

Bond is keen to stress that the bank's first priority is to concentrate on developing the businesses it already has. He says that acquisitions are inherently risky and that sometimes a well-crafted marketing campaign can achieve the same as a more costly acquisition.

However, he is not ruling out deals. "The management team and the board believe that we're going through an unprecedented period of change in financial services," Sir John says. "Our shareholders would expect us to look at things we can make sense of, provided we're disciplined and we've got the capability to execute."

There are some who are skeptical about HSBC's record. In a report published this year, analysts at Citigroup Smith Barney, who examined HSBC's history since 1992, concluded that some deals, including the acquisitions of Republic and French bank CCF were unlikely to have earned a reasonable return on capital. Furthermore, they argued that HSBC's underlying growth was no better than the economic growth of the countries in which it operated.

A broader question is whether financial institutions are becoming so large as to be unmanageable. Over the past year, Citigroup's woes have prompted some investors to question whether the group's size and diversity have made it prone to regulatory lapses and failures of management oversight.

So far, HSBC has avoided these questions. The bank was not a significant player on Wall Street during the stock market bubble and avoided the regulatory embarrassments and legal settlements that have blighted some of its rivals. But it remains to be seen whether it will continue to be as surefooted now that it is beefing up its investment banking business.

Investors also praise HSBC's management culture. Although unusual among the world's largest banks, its top management is dominated by executives who are veterans of the bank. Credit decisions are made not by committees but by individuals, with approvals rising up the chain of command according to the size of the loan.

The bank is famously frugal, a culture that dates to 1865 when Thomas Sutherland, the Hong Kong superintendent of a shipping company, produced a prospectus for a bank based on "Scottish banking principles." Bond, who travels in economy class on European flights and uses public transport in London, personifies this approach. He acknowledges that, as the bank gets bigger, it becomes harder to expand at the same rate. Yet he remains a passionate advocate of the benefits of scale, arguing that the largest financial services groups see better returns. He has made growth the bank's main target. Indeed, Bond argues that the company's continuing appeal to its shareholders, customers and employees depends on its ability to keep expanding. "Our main role in life, as I perceive it, for all of our major constituencies, is to grow this business," he says.